HomeChoice bedding. Picture: SUPPLIED
HomeChoice bedding. Picture: SUPPLIED

Will catalogue retailer and financial services provider HomeChoice International’s shift into bricks-and-mortar outlets mean revisiting plans to raise fresh capital from the market?

In March HomeChoice was weighing plans to increase its free float by a minimum of R1bn by issuing new shares for cash and reducing the holdings of two large existing shareholders.

The capital-raising plans were subsequently shelved as retail conditions took a turn for the worse in SA.

But the group has some significant capital commitments, with executives this week highlighting the retail segment’s new showroom thrust.

The decision to bolster the traditional catalogue and more recent digital sales businesses with a physical presence is aimed at boosting sales and building an omnichannel retail experience.

HomeChoice has a handful of showrooms in SA, and is considering expanding this format to Botswana next year.

The plan — according to an investment presentation — is to open three to five showrooms a year. HomeChoice reckons there is long-term potential for around 30 showrooms.

This "physical expansion" will require a fair bit of funding — which shareholders will be hoping won’t detract from a generous dividend policy. HomeChoice already has long-term interest-bearing liabilities of R627m and short-term interest-bearing liabilities of R157m. The interest bill in the interim period to end-June was R44m, and net cash flow from operations was around R129m.

Cash conversion in the interim period did improve markedly, but remains somewhat underwhelming at 59%. The capital expenditure per showroom averages out at about R6m.

But HomeChoice does point out that the showrooms have attracted new customers with a high cash-sales component of more than 30%. The showrooms are also driving a chunky 35% of new-loans activity in financial services subsidiary FinChoice.

At this juncture, HomeChoice envisages payback on the showroom investments to be around 24 months.

But the showrooms are being launched amid heightened competition from online retailers and increased innovation from traditional retailers.

The next 12 months will be critical in gauging whether the showroom thrust is sustainable.

HomeChoice’s shares have shed about 20% since peaking at around R50 in April.

The illiquid share is accorded a modest earnings multiple of seven, which might dull the enthusiasm of executive teams and major shareholders for offering scrip for cash.